ECB Enters 2026 With Inflation Finally Under Control

Source: Coindoo Original Title: ECB Enters 2026 With Inflation Finally Under Control Original Link: The European Central Bank is entering 2026 with something it has lacked for years: breathing room.

Fresh inflation data suggests that price pressures across the euro area are no longer a policy emergency, strengthening the case for keeping interest rates unchanged unless the broader economy takes an unexpected turn.

Key Takeaways

• Euro-area inflation has settled at the ECB’s 2% target, easing pressure for further rate moves.
• Core and services inflation are finally cooling, though wage growth remains elevated.
• Markets expect rates to stay on hold, with only a small chance of additional easing later in the year.

December figures confirmed that inflation has cooled precisely to the ECB’s 2% objective. More importantly for policymakers, the slowdown is no longer limited to energy or goods. Underlying measures that once refused to cooperate are now easing as well, signaling that restrictive policy has finally done its job.

Why Policymakers Are Comfortable Standing Still

Data from Eurostat shows that core inflation has slipped to 2.3%, while services inflation – long the most stubborn component – has also softened. That combination matters far more to the ECB than the headline figure alone. It suggests that domestic price dynamics, not just global shocks, are cooling.

As a result, the European Central Bank has little incentive to rush into another policy adjustment. Rates have already been on hold since mid-2025, and most economists now expect that pause to extend well into this year unless growth weakens sharply or inflation unexpectedly re-accelerates.

Markets have tentatively adjusted to that reality. Traders are pricing only a limited chance of further easing, with expectations amounting to a small probability of an additional cut by late summer. The euro reflected that balance, stabilizing around $1.17 after briefly dipping earlier in the session.

Inflation Is Cooling, But Not Evenly

Beneath the surface, the inflation story remains fragmented. Recent national readings highlight how uneven the adjustment has been across the bloc. France is already flirting with sub-1% inflation, Germany sits close to target, while Spain continues to run hotter than the average. This divergence complicates policymaking, even as the aggregate picture improves.

Services prices remain the final hurdle. Wage growth across the euro area is still elevated, with comprehensive measures showing pay increases holding near 4% in recent quarters. That level is inconsistent with long-term price stability and explains why services inflation has eased more slowly than other categories.

Lagarde Sees the Trend, Watches the Risks

Christine Lagarde has acknowledged that inflation is moving in the right direction, but she has stopped short of declaring victory. In recent remarks, she emphasized that wage dynamics remain under close observation, while expressing confidence that pay growth should gradually cool as workers complete their catch-up from the post-pandemic inflation shock.

Looking ahead, the ECB’s baseline projections show inflation averaging just below target through much of 2026 and 2027 before drifting higher again later in the decade. That path, however, depends on several uncertain factors, including the impact of US trade policies, a firm euro, and expanded fiscal spending in Germany.

For now, the message from policymakers is clear: inflation is no longer dictating urgent action. The ECB can afford to wait, watch, and react only if the outlook changes meaningfully.